Richard Hagopian: Saving is in vogue again

Friday

Jan 23, 2009 at 12:01 AMJan 23, 2009 at 11:14 PM

Attitudes and behaviors may be shifting in the wake of the financial crisis that has turned into a serious economic downturn. Many are wondering if one result might be the creation of a new generation of pennywise Americans who are more diligent about saving money.

Richard Hagopian

Baby Boomers and subsequent generations of Americans have sometimes looked with bemusement at their parents and grandparents who lived through the Great Depression of the 1930s and the wartime rationing of the 1940s. Many of us can name people we know that, even though they may now be financially comfortable, are still reluctant to spend money even on small extravagances. They seldom throw out leftovers and are content to buy a used car rather than treat themselves to a new vehicle. They seem cautious about what financial disaster may be looming just around the corner and keep their money tucked away.

Fast forward to the era of Baby Boomers and more recent generations and the attitude shifts dramatically. Many who grew up in the second half of the 20th century were bombarded with a consumer-driven culture that started with advertisements during Saturday morning cartoons, continuing with a MTV-obsession and incessant product placements in television and sports broadcasts. Today their consumer desires can easily be satisfied through an endless array of shopping outlets, from huge malls to miniscule cellular phones. No wonder the financial values of the “depression era” seem out of place to them.

Attitudes and behaviors may be shifting in the wake of the financial crisis that has turned into a serious economic downturn. Many are wondering if one result might be the creation of a new generation of pennywise Americans who are more diligent about saving money. It’s too early to answer that question. America has faced significant economic challenges since the Great Depression that did not do much to change consumers’ financial habits. However, is it possible that the current economy will leave a different mark?

More severe consequences

What could be different today is that the consequences of the current downturn are being felt in a more significant and lasting way for many. Much of this has to do with the growth in household debt. Our addiction to debt reached its peak as some homeowners took on huge mortgages and others who probably did not truly qualify to purchase a home were given loans anyway, often with terms they could not meet. Household debt was also expanded in other ways — using home equity loans, for example, to make large purchases. Debt reached students as well who borrowed significant sums for their education. And countless Americans ran up their credit cards, incurring huge interest charges while maintaining high balances.

When the economy weakens, consumers generally take a more cautious approach to spending. But carrying a significant debt burden can make managing living expenses more challenging.

Sticking with cash

In this kind of environment, there is little desire to take on more debt in order to finance purchases. That car you planned on trading in suddenly doesn’t look so bad when you realize you don’t have to make payments on it. Other big-ticket items, like a high-definition TV or a new refrigerator seem like luxury items.

It might become more common for people to pay cash for a big purchase rather than take out a loan or rely on credit cards. This is a far different mentality from what has existed in recent decades as consumerism reached new heights.

As recently as 1985, the personal savings rate for Americans was more than 11 percent of disposable income. As of September 2008, it was 1.3 percent, which is actually a slight improvement from the 2007 low point of barely above zero. A lack of savings makes it difficult to reach financial goals. Now there are signs that attitudes may be changing, and many who were once aggressive consumers with little concern about saving for the future are having a change of heart. There seems to be a growing inclination to defer purchases, get along with what they have, and instead sock their money away for a rainy day. No doubt the dampening business environment, limited or no raises at work, smaller or missing bonus checks and potential unemployment have affected consumers’ attitudes.

Living through a recession

It is entirely possible that Americans today face one of those challenging periods that future generations will read about. Times like these can leave the same indelible impression on those who experience it as the Great Depression had on our parents and grandparents. With that may come a whole new respect for saving and a much more restrained attitude toward spending. Economic consequences aside, this may prove to be a welcome development if it helps you reach your financial goals.

Richard C. Hagopian is a Chartered Mutual Fund Counselor and a financial advisor with Ameriprise Financial Services, Inc., in Waltham. He can be reached at 781-890-2215 or by e-mail at richard.c.hagopian@ampf.com.

This column is provided for informational purposes only. The information is intended to be generic in nature and should not be applied or relied upon in any particular situation without the advice of your tax, legal and/or your financial advisor. Neither Ameriprise Financial nor its advisors or representatives provide tax or legal advice. The views expressed may not be suitable for every situation. Consult with qualified tax and legal advisors concerning your own situation.